Weekly Market Commentary

If you look closely, you’ll notice that the comment in the box above is exactly
the same comment we used when we last published – three weeks ago. That’s
how little has changed. Even though the market has risen steadily over that time
and has moved to new post-2007 highs, the indicators have not relinquished their
bullish status. This is a classic example of a new bullish phase that continues to
rise while the indicators are overbought.

$SPX itself had been contained within a range of 1495 to 1515 for about two weeks.
This week, though, the index has broken out to new highs, above that 1515 level.
These prices were last seen in late 2007. In a more volatile environment,such an upside breakout
would engender a great deal of momentum,dragging in buying from the sidelines. That has
not happened. Rather, the markethas traded in an even narrower range after the breakout.

Technically, that 1495 to 1515 level should provide good support for any pullbacks. In fact,
a close below 1495 would be negative, and would probably signal the onset of a more severe
correction. Below there, support exists at 1460-1470, the area of the 2012 highs.

Meanwhile, the equity-only put-call ratios have struggled to find their way. Normally, with
the market making new multi-year highs, call buying would be extreme, and the put-call ratios
would be racing lower on their charts. Actually, there is plenty of momentum-chasing call buying.
But there is another factor: the cheapness of put options has enticed investors to buy puts to protect
portfolios. Hence put buying has been fairly heavy, even though prices are making new highs. That
is a distortion caused by hedging, and it made the put-call ratios flatten out and trade sideways.
Over the past few days, these ratios have started to move lower again, reasserting buy signals.

Market breadth has been steadily strong. Thus, our breadth oscillators have remained on buy
signals all along, although they too are in overbought territory. The advance has been so controlled
and steady that there has not been a single “90% day” since January 2nd. That is quite unusual. We
also keep track of the frequency of 90% days over the past 50 trading days (see Volume 21, No. 21).
That indicator issued a sell signal some time ago, but there have been so few 90% days that the
frequency is dropping quickly. It is now back down to two and is trending lower. That sell signal
has been negated as a result.

Volatility indices ($VIX and $VXO) traded up briefly when there was a tiny
market correction last week. However, they are now back to nearly their yearly lows –
the same levels last seen in July, 2007. As long as $VIX is this low, it might be
considered overbought, but it is not a prohibition to higher stock prices. If $VIX
were to rise above 15, that would be negative for stocks.

The construct of the $VIX futures continues to be bullish, with futures at a premium

(especially in later months), and the term structure sloping steeply upward.
As we’ve noted before, though, this is a normal construct with $VIX at such low
levels, so it probably is not much of a stock market indicator in that regard.

This market continues to plod higher without much fanfare. It doesn’t pay to anticipate a
correction; there are already plenty who have been carried out on their shields trying to do that.
Rather, we will wait for some confirmed sell signals before altering our still-bullish view.

Larry McMillan